Appeal upheld: banks to pay back billions to Bell Group
creditors

An appeal to the Western Australian
Court of Appeal by a syndicate of banks, including Commonwealth
Bank, Westpac, National Australia Bank, HSBC Australia and
international banks, has not only failed but resulted in the banks
now being required to pay almost twice as much as what was
initially ordered, to the liquidators of The Bell Group Ltd
(Bell Group).

When the Bell Group collapsed in 1991,
the banks recovered assets worth some $280 million.

Now the banks are likely to pay between
$2 billion and $3 billion to the Bell Group after the Court of
Appeal held that the monetary relief initially ordered was
incorrectly based on a 'deflated multiplier'.

In October 2008, Justice Neville Owen
handed down his historical decision, ordering the banks to pay
roughly $1.6 billion to the Bell Group, which included the
repayment of proceeds from the sale of the Bell Group assets
together with compound interest estimated at $1.2 billion.

In 1990 the banks had agreed to extend
the Bell Group's loans in an attempt to allow it to restructure and
remain afloat, and in exchange were given guarantees and security
over the Bell Group's assets.

The Bell Group was at the time on the
brink of insolvency and the banks were found by Justice Owen to be
liable as knowing recipients of the company's trust property.

In the appeal, the banks argued, among
other things, that they had been convinced by the director that
refinancing was in the best interests of the Bell Group.

The liquidators of the Bell Group
cross-appealed, claiming the banks were 'knowing participants' in
alleged breaches of duty by the directors of the Bell Group and
that the transactions entered into between the directors and the
banks, namely, the handing of the Bell Group's assets to the banks
as security, were unconscionable bargains.

On Friday 17 August 2012, the Western
Australian Court of Appeal held that the orders made by Justice
Owen would largely stand, with some amendments.

Legal representatives for the banks
have indicated they are reviewing the Court of Appeal's 1026 page
judgment and may consider an appeal to the High Court.

Applications to extend time - the liquidator's duty of
candour

In the recent decision of Williams as Liquidator of Willahra
Pty Ltd (in liquidation) v Kim Management Pty Ltd [2012] QSC
143, the Supreme Court of Queensland sent a timely reminder to
liquidators of the importance of making full disclosure to the
court and any affected parties where ex parte applications are made
for an extension of time to bring voidable transaction claims.

In August 2011, Julie Ann Williams, in her capacity as
liquidator (Liquidator) of Willahra Pty Ltd (in
liquidation) (Company) obtained an order under
section 588FF(1) of the Corporations Act 2001 (Cth)
(Act) granting an extension of time to bring
unfair preference claims against a general, blanket class of
potential defendants (shelf order), as opposed to
an order regarding any specific defendant.

The Liquidator then sought to commence an unfair preference
claim against Kim Management Pty Ltd (KM) within
the extended timeframe. Because the section 588FF(3)(b) order was
brought ex parte, KM challenged the shelf order on the
basis that:

(a) KM was
not notified of the application, despite being affected by it, and
so was not afforded the opportunity to address the case before it;
and

(b) the Liquidator
failed to fulfil her disclosure obligations to the court, including
identifying likely prospective defendants to any unfair preference
claims.

Relevantly, the Liquidator's affidavit filed in support of the
application to extend time, explained that ongoing disputes with
the receivers had prevented her from conducting investigations to
determine whether she would bring proceedings in relation to
specific impugning transactions. However, in contradiction to this,
in a report to creditors at least 16 months earlier, the Liquidator
stated that she had identified a number of transactions which may
be regarded as unfair preferences.

KM argued that:

the Liquidator had failed to investigate the alleged
preferential transaction between it and the Company, despite being
aware of the facts of the transaction;

the transaction was not, but ought to have been, disclosed to
the court in the original extension application;

as a result of the Liquidator failing to act with reasonable
diligence and identify KM as a potential defendant, and as a result
of KM not having received notice, the shelf order was made in a
manner inconsistent with KM's right to be heard before the
court.

Accordingly, KM argued that the circumstances in which the shelf
order was granted amounted to a denial of natural justice and
sought that the court set aside the order extending time, by virtue
of the court's inherent jurisdiction under the relevant court
rules.

Having examined the criteria that must be satisfied for an
extension to be granted ex parte and whether the
Liquidator failed to properly exercise the requisite duty of
candour in her original section 588FF(3)(b) application, the court
set aside the shelf order, holding that there is an overriding duty
of candour that applies to all ex parte applications,
which requires full and fair disclosure of all material facts known
to the applicant (ie the Liquidator), including all facts
discoverable by making proper inquiries prior to the
application.

Relevantly, materiality is decided by the court and not the
applicant/liquidator and the extent of inquiries will be determined
on the facts of the case (for example, having regard to the time
available to the applicant/liquidator to make inquiries and carry
out relevant investigations).

In his judgment, Justice Dalton referred to the decision of
Greig v Stramit Corporation Pty Ltd [2003] QCA 298,
agreeing with the Court of Appeal in that case, that it would be
rare for a liquidator to be unable to identify the persons against
whom proceedings maybe brought under section
588FF of the Act within the statutory three-year period, and that
such occasions are reserved for 'when a liquidator is able to
demonstrate to the court that the date of the liquidator's
appointment, or the state of affairs of the relevant company, have
resulted in the liquidator being unable to describe the nature of a
possible application or applications to be brought and the identity
of the potential respondent or respondents…'[1]

Having regard to the extensive judicial decisions before him,
His Honour resolved that:

'…it is clear that it [ie a
shelf order] should only be made in extraordinary
circumstances, the same type of extraordinary circumstances which
might motivate a court to act ex parte on, for example, an
application for an interim injunction.

Concomitant with that, is the
notion that on such an ex parte application the applicant has a
duty to make full and proper disclosure to the Court of any fact
which might tend against granting the application. Also consistent
with the nature of the application, in my view, is a necessity to
grant orders which create the minimum interference with the rights
of persons who are not heard. Care should be taken so that only the
minimum extension of time necessary is granted….

Where a person is identified by
a liquidator as someone who might be the target of a s 588FF(1)
application, but is not given the opportunity to be heard on the s
588FF(3)(b) application, that person is entitled ex debito
justitiae to have the order set aside. It is not necessary to show
anything more than that the applicant is affected by the order and
was not given an opportunity to be heard before it was
made.'[2]

Justice Dalton held that the Liquidator had been obligated as
part of her duty of candour but had failed to:

file accurate submissions in the extension application;

identify KM as a potential defendant;

disclose ambiguity in relation to the impugned
transaction;

make proper inquiries to identify defendants who might be
affected by an unfair preference action; and

This case is a timely reminder that while section 588F(3)
provides a valuable process for liquidators to extend the period
during which the liquidator can bring voidable transaction claims,
the duty of candour requires that the liquidator make comprehensive
inquiries to identify all potential defendants, that all relevant
facts are disclosed to the court, and that all potential parties
affected by an application are given notice of same.

Australian PPSA decision: court confirms administrators'
conduct

We have recently had the opportunity to work with administrators
in creating a strategy for the sale of plant and equipment at
auction having regard to the new Personal Property Securities
Act2009 (PPSA). This strategy was
subsequently ratified by the court.

On 5 July 2012, the Federal Court of Australia handed down its
first PPSA-related judgment in Carson, in the matter
of Hastie Group Limited (No 3) [2012] FCA 719. In its
judgment, the court approved the strategy to sell plant and
equipment at auction in circumstances complicated by, inter alia, a
lack of company information and the new PPSA regime.

In doing so, Justice Yates provides the first guidance from an
Australian court for administrators selling assets outside the
ordinary course of business as to what conduct may be held to be
reasonable in identifying potential security interests in those
assets.

Background in brief

Numerous issues confronted the administrators of the Hastie
group of entities upon their appointment. One issue involved
determining which of the plant and equipment in the possession of
the Hastie group was encumbered by security interests and which
could be sold at auction.

This was complicated by a variety of factors, including the
inadequate books and records of the Hastie group which, among other
things, failed to note which assets had moved between which of the
1,000 sites operated by the Hastie group across Australia. The
matter was further complicated by the fact that most of the 987
registrations recorded against the Hastie group contained
descriptions of the secured collateral which did not clearly match
the plant and equipment on hand.

In particular, it was necessary to consider the impact of the
new PPSA regime. Under the PPSA, a third party (here, the
purchasers at auction) will only take goods free of the security
interest holder's rights (here, the rights of the registrant or the
rights of a security interest holder under the transitional
provisions (collectively, Secured Parties)) in
certain circumstances. There is some question as to whether these
circumstances include the sale at auction of plant and equipment.
If such sale is not excluded by the PPSA, there is a risk that a
Secured Party could subsequently claim rights in the assets or
proceeds after their sale at auction, notwithstanding that the
administrators were not on notice of those rights.

The strategy

The court relied upon the conduct adopted by the administrators
in forming its views. The strategy developed included:

various notices of the administrators' intent to sell plant and
equipment to be sent to registrants recorded on the PPS Register,
to approximately 3,000 creditors and to the 12 financiers recorded
in the group's books and records;

advertisements listed in various newspapers (both national and
in the relevant states) requesting that any creditors with a right
in the assets in the possession of the Hastie group contact the
administrators; and

a period of 3 months, during which time the administrators
would hold the proceeds of the auction in escrow in case a
creditor's claim subsequently arose.

This strategy was intended to provide creditors with sufficient
opportunity to alert the administrators to their claim without
hindering the efficient and effective progress of the
administration.

The lessons

For suppliers, Hastie confirms the importance of acting
quickly to alert administrators / liquidators / receivers of any
claim that you may have in assets in the company's possession. In
doing so, it is recommended that you provide sufficient detail to
enable the insolvency practitioner to identify the assets the
subject of your claim. Failure to put an insolvency
practitioner on notice of your claim may result in those assets
being sold.

For insolvency practitioners, Hastie provides guidance
as to what the court may consider constitutes reasonable conduct in
selling outside of the ordinary course of business assets which may
be the subject of a security interest. It is reassuring to see the
court endorse a commercially sensible approach in this
regard.

Grape Exchange Management Euston Pty Ltd (GEME)
provided grape-harvesting services to Grapecorp Management Pty Ltd
(in liq) (Company) (an entity part of the
Timbercorp Group), pursuant to a Management Agreement executed by
the parties in January 2008 (Agreement), and in
return for its services, the Company agreed to pay management fees
to GEME.

Under the Agreement, GEME was engaged:

(a) as an
independent contractor to provide services which included
cultivation, maintenance, harvesting; and

(b) as
agent, to carry out marketing services which included the sale of
the harvested grapes. In doing so, GEME's obligations included
paying the net proceeds from the sale of grapes to the Company
(less marketing fees and freight costs, levies and royalty fees and
direct costs and expenses).

At no time did title to the grapes pass to GEME.

On 23 April 2009 administrators were appointed over the Company
and on 29 June 2009, the creditors of the Company resolved to wind
up the Company and liquidators were appointed.

The 2009 grape harvest season commenced early 2009 and was due
to be completed by mid-May 2009. It was accepted by the court that
by the time the administrators were appointed to the Company on 24
April 2009, GEME had commenced harvesting, marketing and selling
grapes from the 2009 crop and collecting proceeds from those sales
pursuant to the Agreement.

Between February 2009 and 19 December 2009, GEME collected
$2,831,796.87 from the sale of grapes on behalf of the Company.
However, GEME paid $475,313.48 to the Company and retained the
balance (ie $2,356,483.40) (Balance) as payment
for services rendered (that is, in payment of its direct costs and
expenses and management fees, which it claimed totalled
$2,711,995).

Issues in disputes

The Company brought legal proceedings to reclaim the Balance
retained by GEME.

However, GEME counterclaimed that it was still owed $355,512,
being the difference between the Balance and the costs it incurred
in providing the grape-harvesting services under the Agreement.
(The parties did not dispute that GEME had been paid by the Company
for all direct costs and expenses and management fees for the
period ending 23 April 2009; that is, prior to the administrators
being appointed.)

GEME did not dispute that it had collected the proceeds or that
ordinarily it would have to pay the amount collected to the
Company, but asserted that it had a right to set-off under section
553C of the Corporations Act 2001 (Cth)
(Act).

Set off

His Honour Justice Sifris had to
determine whether GEME was entitled to set off the Balance under
section 553C of the Act. That section provides:

1. Subject to subsection
(2), where there have been mutual credits, mutual debts or other
mutual dealings between an insolvent company that is being wound
up, and a person who wants to have a debt or claim admitted against
the company:

(a) an account is to be taken of what is
due from the one party to the other in respect of those mutual
dealings; and

(b) the sum due from the one party is to be
set off against any sum due from the other party; and

(c) only the balance of the account is
admissible to proof against the company, or is payable to the
company, as the case may be.

2. A person is not
entitled under this section to claim the benefit of a set-off if,
at the time of giving credit to the company, or at the time of
receiving credit from the company, the person had notice of the
fact that the company was insolvent

In response to GEME's claim for set-off, the liquidators of the
Company:

disputed mutuality and indeed any indebtedness capable of
set-off. The Company argued that all amounts received by GEME
referable to the sale of grapes under the Agreement were trust
moneys and should be paid to the Company without any deduction or
set-off. Further, as a result of the Company being the beneficial
owner of the trust funds, it was submitted that a key element of
set-off, that is mutuality, was absent; and

contended that GEME could not claim the benefit of a set-off
under section 553C(1) of the Act because at the time the amounts
claimed became owing, it was aware of the Company's insolvency
(under section 553C(2) of the Act, knowledge of insolvency
precludes a right of set-off).

In response, GEME argued that:

it extended credit to the Company when the Agreement was
entered into by the parties, and not when the specific marketing
and management services were performed by GEME;

there was no suggestion that the Company was insolvent at the
point the Agreement was entered into by the parties, or that GEME
had any awareness of the Company's insolvency; and

the proceeds collected were not trust funds but rather, it
received the funds as agent for the Company, not as trustee.

Court finding

Justice Sifris rejected the liquidator's submissions,
concluding:

While the Agreement was silent as to whether GEME was a trustee
of the sale proceeds, having assessed the presumed intention of the
parties by reference to the Agreement and surrounding circumstances
(that is, in light of GEME not being required to hold and keep the
proceeds received in a separate bank account and all amounts
received by GEME were deposited into GEME's own bank account and
mixed with other funds received), His Honour concluded that no
relationship of trust was present and that the element of mutuality
existed.

'Post-liquidation receipts, payments and debts are capable
of set-off provided they existed as contingent claims at the
commencement of the winding up and are of a kind that ultimately
mature into pecuniary demands capable of set-off.' His Honour
concluded that at the relevant date (in this case, the appointment
of administrators on 24 April 2009), 'all relevant payment
obligations on each side were existing and vested so as to provide
a proper foundation for set off in relation to the amounts that
subsequently matured and crystallised and indeed ended in money
claims'. His Honour reasoned that both the proceeds received
and expenses incurred by GEME were pursuant to the terms of the
Agreement, which specifically and by agreement of the parties,
remained alive post-liquidation, finding that while new work was
carried out by GEME, there was no new transaction and the fact that
there was 'fresh activity' was irrelevant because the 'events
giving rise to the debits and credits took place in the natural
course of events and in the ordinary course of business'.

The relevant time for assessing insolvency is 'not when the
debt became payable but when the obligation which arose from it was
incurred'; that is, when the Agreement was first executed by
the parties. Therefore, any notice or knowledge of the Company's
insolvency must be demonstrated at the date the Agreement was
executed by the parties (ie January 2008). His Honour found there
was no suggestion that the Company was insolvent at that date and
accordingly, section 553(2) did not operate to preclude the set-off
by GEME.

Accordingly, His Honour held that GEME
was entitled to set-off in respect of its fees for services
rendered and the liquidators' claim was dismissed.

What this means for insolvent companies and
liquidators

This Victorian Supreme Court decision clarifies the application
of set-off provisions for companies in liquidation, confirming a
creditor can set off amounts it owes to companies in liquidation
for post-liquidation debts, against amounts which are owed by the
company to the creditor at the date of the winding up, in
circumstances where the post-liquidation debts arose from
pre-liquidation obligations. This decision is a timely reminder for
liquidators that rights of set-off in relation to transactions can
arise post the winding up of a company.

Establishing insolvency of a company with limited financial
records

'The central
feature of the insolvency concept is clear: a person is insolvent
if he or she is unable to pay debts as they become due. But
thereafter, the fog descends.'[1]

Under several provisions of the Corporations Act 2001
(Cth) (Act), whether a company is insolvent or not
must be determined. In some instances, the court will assess the
company's solvency at a particular time (for example, in insolvent
trading claims, the company must be insolvent at the time the debt
was incurred) and in other instances a historical assessment is
required (for example, unfair preference claims require the company
to be insolvent prior to the relation back period or the first
voidable payment being made).

Judicial indicators of insolvency

In determining whether a company is or
is not solvent, there are a number of factors that a court will
take into account, including the company's access to cash and its
ability to sell assets. In ASIC v Plymin (2003) 46
ACSR 126, the court referred to a checklist of 14 indicators which
are to be considered when assessing the solvency of a company.
While any one of these indicators alone is not determinative of
insolvency, a combination of the following factors may be
conclusive evidence of insolvency:

continuing losses

liquidity ratio below 1

overdue commonwealth and state taxes

poor relationship with present bank including inability to
borrow further funds

no access to alternative finance

inability to raise further equity capital

suppliers placing the debtor on COD, or otherwise demanding
special payments before resuming supply

creditors unpaid outside trading terms

issuing of post-dated cheques

dishonoured cheques

special arrangements with selected creditors

payments to creditors of rounded sums, which are not
reconcilable to specific invoices

solicitors' letters, summons(es), judgments or warrants issued
against the company

inability to produce timely and accurate financial information
to display the company's trading performance and financial
position, and make reliable forecasts.

Additional indicators of insolvency

From an evidentiary perspective, demonstrating insolvency of a
company where there are limited financial records can also be
achieved by considering additional factors that may have been
present during the relevant period, including whether:

the company's debtors have aged substantially over time.
Further, if those debts are uncollectable or whether the company
was experiencing difficulties selling stock;

the company is unable to pay its trade creditors within agreed
trading terms and if the amounts owing to trade creditors exceed
the company's cash resources and the amount owing by debtors of the
company;

the company was continuously delayed in making payment of
monies due to its creditors, or was in breach of instalment
arrangements in place with creditors or had payment arrangement
requests refused;

the company maintained an overdraft facility with its bank and
the amount of any overdraft during the relevant period. Also,
whether there were any defaults on loan or interest payments by the
company;

the company had changed its banking institution or lender (and
the reasons why) or there was increased monitoring/involvement by
the company's financier;

there are charges against the company which, during a
receivership or liquidation, have not been satisfied
notwithstanding assets of the company having been realised;

there are any unrecoverable loans to associated parties;

there are letters of demand or overdue payment reminders sent
by creditors to the company or threats of legal action/commencement
of legal proceedings if the company did not comply with creditor
demands for payment.

The insolvency of a company in circumstances where there is
limited financial information in the form of financial records can
often be demonstrated by preparing an analysis of the
abovementioned factors (where available) and collating all relevant
material.

In our experience, providing the other side (for example, the
debtor in a voidable transaction claim, or director in an insolvent
trading claim) with an analysis of the available material (albeit
in circumstances where limited financial records are available), to
prove insolvency often encourages quick settlement.